THE West urgently needs policies which stimulate growth. The IMF has indicated 'the global economy has entered a dangerous new phase – the recovery has weakened considerably. Strong policies are needed to improve this outlook and reduce risks.'

The Bank of International Settlements with a good forecasting record has warned that when government, household and corporate debt get to a certain level, this will limit growth.

They conclude that the advanced economies with high debt must act decisively to address the fiscal problem and the longer the wait, the more difficult it will be.

The UK government is absolutely right to give high priority to reducing the budget deficit.

Confidence is vital if progress is to be made. The government cannot create the jobs required for growth, only business can do so in a favourable environment. Business must be allowed to operate with lower taxation and less interference and less regulation.

The UK is going to be affected by the outcome in Europe. European heavily indebted nations will have to be bailed out by the wealthy creditor nations if the Euro and, indeed the Union, is to survive.

Bond yields have fallen considerably in the flight to safety and indicate deflation. Equities may be cheap but the value very much depends on growth.

Equities are yielding more than gilts and this is an anomaly at the present time.

The present is a time for caution. There has never been a more important time for diversification into quality assets.

THE MARKETS

US
The US has $14 trillion of debt, almost as large as its GDP. The housing market is still in a poor way in the US and consumers are not spending. However, there is likely to be stimulus in the two years leading up to the presidential election. The US is the largest economy in the world, they have to get it right.

UK
The UK has to manage its deficit carefully so as not to harm growth. There is not an easy solution to this problem, we need growth with a low risk of inflation. Unemployment is high. Company balance sheets are strong and equities are reasonably cheap.

Europe
Greece will default on its debts with the likely transfer of resources from the wealthy creditor nations to the poorer debtor nations. There has to be a political solution to this economic crisis.

Far East and emerging markets
These markets have superior rates of growth with good demographics and low debt levels. There is a substantial shift of wealth from the West to the East.

Japan
Japan is forecast to have negative growth, but they have great reserves, a strong currency and some world class companies with their shares trading at below book value. The Japanese consumers are starting to spend. It is the third largest economy in the world.

Commodities
These are very dependant on growth in China, India and the Far East and continuing growth will underpin the demand for commodities.
We have seen gold is in a strong uptrend which started in about 2000 and can be regarded as an insurance against trouble and turbulence.

Bonds
The Bond markets have seen a flight to safety in very volatile times. At present the Bond markets predict deflation, although inflation may be a problem later on. We are still in a deflationary period and if quantitative easing becomes excessive we will have significant inflationary problems in the medium term.

Conclusion

1. Equity markets are likely to have continued volatility.

2. Gold may be regarded as a safe haven and an insurance against turbulence and trouble.

3. The large international stocks on the UK Stock Exchange give geographical spread and in many cases good well covered dividends.

4. Bonds have appreciated in a flight to safety, but they are not cheap.

5. Economic power is going from west to east.

6. Creditor nations will have to bail out the debtor nations.

7. It is a time of caution but also of opportunity.

:: Iain Nicholson is a director of Iain Nicholson Investment Management Limited, which is authorised and regulated by the Financial Services Authority.